Gratuity Valuation in CTC

Section 7 of the Payment of Wages Act 1936 (PWA) permits deductions which can be made from wages and does not allow statutory deduction under the Payment of Gratuity Act (PG). A register is required to be made under the PWA to furnish the details of deductions other than mentioned under the above section. Section 20 of the act attracts penalty to contravene section 7 of the act. Better read with case laws, to have more understanding the law.

The preamble of Payment of the Gratuity Act itself is clear that it was enacted to introduce a scheme for payment of gratuity for certain industrial and commercial establishments as a measure of social security. The significance of this legislation lies in the acceptance of the principle of gratuity as a compulsory retrial benefit. (ref: Jeevan Lal Ltd. v. The Appellate Authority under the Payment of Gratuity Act.

The Act itself is Payment of Gratuity and not the Deduction of Gratuity. In nowhere in the act, it states of deductions and however, the word ‘payment’ has been used. No act fully describes to its executions principles and therefore, the appellate authorities and legislative courts have the jurisdiction to impinge into its interpretations.

“Gratuity” as observed by the Supreme Court in its etymological sense, means a gift, especially for services rendered or return for favours received. See AIR 1970 SC 919, Delhi Cloth & General Mills Co. Ltd. v. Its Workmen. The general principle underlying the gratuity scheme is that by their length of service, workmen entitled to claim a certain amount as a retrial benefit. See AIR 1960 SC 251, Indian Hume Pipe Co. Ltd. v. ts Workmen. Gratuity has to be considered to be an amount paid unconnected with any consideration and not resting upon it and has to be considered something given freely or without recompense. It does not have foundation on nay legal liability, but upon a bounty steaming from appreciation and graciousness. Long service carries with it expectation of an appreciation from the employer and a gracious financial assistance to tide over post retrial difficulties.

Section 4(1) incorporates the concept of gratuity being a reward for long, continuous and meritorious services. It creates right infavour of an employee and at the same time creates an obligation upon a employer. (Jeevan Lal Ltd. v. The Appellate Authority under the Payment of Gratuity Act. Therefore it is a claim arising on his superannuation, retirement, resignation, on death, and disablement due to accident or disease and not by deduction from his own salary.

Section 8 if the act prescribes about the recovery of the gratuity and section 9 about the penalty. It is a punishable offence with an imprisonment.

Some companies, cut corners when giving an offer to a canditate by including gratuity amount in the break up of salary offered. [the analogy being that if the company spends, its your income and thus it is to be included in the CTC i.e. the package offered to the new employee].This is not only misleading but unethical too. I have my self a victim of the said practice. Gratuity is paid only upon leaving the company after at least 5 years in the employment. If one resignes, within five years, he gets nothing, and thus, the company has not paid him as promised in the break up of package offered at the time of joining the company.

If gratuity is included in the break up of package offered, then the company should pay the same to the employee irrespective of the employee completes 5 years or not otherwise it is a breach of contract. However, employees mutely accept this injustice because, one man cannot fight the corporate, besides, in the appointment letter, only basic salary is mentioned and the other components are "as per the rules of the company"

HR professionals should NOT indulge in these type of malpractices and injustices to the employees.

Thank you

I feel gratuity should nt be calculated in company CTC. its one kind of cheating. 70% of the employees are not staying 5 yrs in a company in nowadays generation. none of the companies keeping the gratuity money aside for the employees. and if someone stays as long as 5 yrs in a company. He/she should have seen many ups and downs and faced many criticle situation in that company and supported when required. in that case company can show little effort by providing the financial support in the name of gratuity.

Pari,

I can suggest a solution to your query to Sumana.

For grade wise, you first decide on the insurance cover.
Say, if you wish to cover employee and 3 dependants for grade C and employee only for lower grade say grade D, first come up with a clear policy of coverage amount.
Say, for grade C the cover is for 3 lacs and grade D it is only 2 lacs. You may please explore on the floater cover which is beneficial to your Organisation.

Now the premium amt may vary for each employee based on the composition of the age and number of dependants covered. The actuals will be given by the insurance company. This can be included in the CTC of the person.

Alternately, the average premium per head under each grade may be calculated when you enter into the insurance cover or at the renewal of the cover and it can be uniformally included to all employees in that particular grade in their ctc.

Hope that my explanation clarifies your query. In case of any further clarification, pl feel free to contact me.
Regards,
Shoba

Dear Sumana,

Gratuity can and should be included as part of the CTC as the money ultimately goes to the employee's pocket. I have seen that some companies pay gratuity even if the person has not completed five yrs. as reqd. by law. This is because it is deemed part of the CTC. However, this is not mandatory. Gratuity can be shown as part of the CTC with the condition precedent that it will be paid only if the employee completes five years. Some companies also have a similar rule for superannuation also.
There is no statutory bar for showing Gratuity as part of the CTC.
The correct formula for calculating Gratuity is: (Basic) OR (Basic+DA) / 26 X 15 X No. of yrs. of service.
In my opinion, any payment in cash or kind, payable to the employee or as part of the cost being incurred by the organization towards the maintenance of the employee, whether paid monthly, annually or in a deferred mode (like gratuity & superannuation) or being paid to some other agency for extending facility to the employee (e.g. Holiday Homes, Club Memberships etc) should be a part of the CTC.
The employee can be explained the different segments of his/her remuneration accordingly. e.g. Monthly Payments, Annual Payments, Retirals, Incentives, Bonus etc.
Hope this would be of help. Pl. revert if u want further clarifications.
Regds.
Ranjit J. Pandya

Dear All,

I do think that Gratuity must be a part of an employee's CTC but let me know if an employee left the organisation in two or three years then in that case should he not entitled for the amount incurred in the name of Gratuity per month..and if employer won't play should it not be considered as an income for any company( becoz the gratuity amount is after all calculated on BASIC of an employee's salary.

Please clarify the same....

With Regards,

Amit

Hi

If a person is working in a software company and the number of working days is 22 what will the gratuity percentage.

Dear Pari & Friends,

As Muthulakshmishobha has explained you to compute the medi-claim cost.

In a more simpler way:

An organisation gives the medi-claim policy to the employees (only for the employee)
For Grade A - 2500 premium amount p.a
Grade B - 2000
Grade C - 1500

In such a case, the employee (A) has to get the policy done for the sum assured 200000, with the premium amount of Rs 2500/- pa. In case if the premium amount is Rs. 3000/-, then you can consider Rs. 2500/- in computing the CTC. (2500/12)= per month.

So try to understand the medi-claim cost from the premium slab fixed in the organisation, than from the sum assured as there are factors considered like age.

Sumana

Yes Gratuity can be shown as a yearly benefit in CTC. we follow this in our org. this is totally legal.Company calculate Medical Insurance in its CTC but it is not shown in Employees Salary Structure but Gratuity is shown in Employees salary Structure.

Satya